The costs of free: commoditization, bundling and concentration

Abstract

AbstractDigital markets offer abundant free content but exhibit extreme concentration among content aggregation intermediaries. These characteristics are linked. Weak copyright environments select against stand-alone content-delivery structures and select for bundled aggregation structures in which free content for users promotes positively priced advertising and data-collection services for firms. Dominant intermediaries promote commoditization, and the reallocation of market rents from content producers to content aggregators, through litigation and free content distribution that weaken copyright protections. The potential net welfare effects raise concern. Network effects, compounded by weak inventory constraints, scale economies, and learning effects, promote winner-takes-all outcomes in the intermediary services market while weak copyright may generate output distortions in the content production market.